Starbucks reports on the continued recovery from the impact of the COVID-19 pandemic
Starbucks UK registered EMEA business and UK Coffee Company today filed accounts for the financial year ending 3 October 2021.
FY21 Financial overview:
Starbucks UK Coffee Company (in GBP):
- Total revenues: £328m, up 35% driven by the recovery of sales in both Company owned stores and Licensed/Franchised stores from COVID-19
- Gross profit: £95.1m increased due to COVID-19 recovery
- Operating Profit: £16.5m, up from loss of £37.4m driven by increase in revenues
- Profit before tax: £13.3m, increased from £41m loss in FY20
- Total UK corporation tax charge: £5.4m (2020 credit: £4.4m)
Starbucks EMEA (in USD):
- Total Revenues: $237m, up 41%, driven by increase in licensees' royalties which improved with recovery from COVID-19
- Gross profit: $166m, up from $81m in FY20 driven by recovery from COVID-19
- Operating Profit: $40.5m, increased from $74m loss in FY20, through recovery from COVID-19 and reduction in administrative costs
- Profit on Ordinary Activities before tax: $190m
- Total UK corporation tax charge: $13.2m compared with $1.3m in FY20 due to increased operating profit
FY21 Operational overview:
- A strong recovery in revenues was recorded over the twelve-month period, as trading began to normalise in most key markets across EMEA.
- The first half of the year in particular was heavily impacted by lockdowns and other restrictions on trading imposed in relation to the COVID-19 pandemic. As restrictions eased, our trading position improved.
- We have seen the benefits of our investment in new store formats and sales channels, with takeaway, delivery and Drive Thru all making sharply improved contributions to the business. This leaves us well-placed for the future.
- Yet the operating environment remains extremely challenging. Inflation is having an impact across the business, with almost all input prices now rising. Supply chain disruptions and labour shortages have been an issue, as they have for many other global companies.
- Our people are central to the success of our business, which is why we have increased wages to remain an attractive employer.
Duncan Moir, President Starbucks Europe, Middle East and Africa, commented: “We have had a difficult operating environment with the first half of the year continuing to be impacted by COVID-19 restrictions. However, our trading position improved as restrictions were eased and we have since experienced a sharp bounce-back in trading.
“The pandemic accelerated customer trends towards convenience and we are continuing to see strong demand in Drive Thru, on-the-go formats and delivery platforms.
“Our investment in technology has been key in making sure we are well placed for these changing dynamics and we have also adapted our operating model to ensure that we can be more flexible and agile. We're optimistic that these actions position Starbucks for long term growth both in the UK and EMEA.”
The UK is the largest market for Starbucks in EMEA. Our performance in the UK is captured in the accounts of Starbucks UK Coffee Company. At the year end, Starbucks had a total of 1000 stores in the UK, of which 297 were company-owned and 703 were run by licensees – a 30/70 split, approximately.
The key factor in the UK during the period was the impact of the second and third lockdowns. In response to government guidelines, our stores moved to a reduced operating model from November 2020 to March 2021. With indoor cafe seating restricted, Starbucks operated primarily through its Takeaway, Delivery and Drive Thru channels during these lockdown periods.
On 20 March 2021, as restrictions eased, we saw strong demand for our products as we moved back to our standard operating model. There was particularly strong footfall recovery in suburban locations and our stores in retail parks. Drive Thru and delivery have performed well. Our office, travel and inner-city locations have all been much slower to recover, however.
The sharp recovery in trading led to a 35% increase in revenues compared to the same period in 2020. That in turn led to us recording pre-tax profits of £13.3m, compared to a loss of £40.9m in the same period last year.
While the improvement is welcome, the financial performance of company operated stores has not yet recovered to pre-pandemic levels. Our future growth plans are focused on further expansion of our new formats and sales channels, working in partnership with our licensees.
UK market trends
The UK market continues to experience a shift in consumer demand and sentiment. Footfall has not recovered in traditional high streets, with consumers increasingly making retail purchases online.
Behavioural changes that developed during the pandemic are persisting, with working from home and hybrid working evidently now a normal pattern of life for many of Starbucks customers.
Our Drive Thru, on-the-go formats and delivery platforms all continue to grow. By the end of the reporting period, a total of 611 stores were on delivery platforms, across various cities in the UK. We now operate with three delivery aggregators, including Just Eat and Deliveroo which were onboarded in the year. Mobile order and pay (MOP) continues to be a key focus for the Company, with a new reward system in place from FY20, and investment made in the mobile platform. Although cash was brought back into stores within the year the business has seen consumer trends move towards digital payments and looks to build upon this through the rollout of further digital initiatives to streamline the customers' online experience.
Our average spend per customer has been increasing. Although transaction numbers have been recovering only gradually, sales have picked up more quickly owing to strong ticket growth.
Sales growth has been driven by an increase in cold beverages, a higher rate of food sales and a limited number of price increases. In addition, the average customer spends more when buying through delivery or Drive Thru than they do in a traditional store.
Our business is contending with operating cost increases at the same time as competition intensifies, with takeaway food chains and restaurants focusing on coffee as a secondary discounted offer. Starbucks aims to provide a quality consumer-focused product and service to retain and grow its market share.
In common with our competitors, our UK business has been impacted by shortages of HGV drivers, packaging material shortages, rising supplier costs and shipping delays. Both Starbucks and its suppliers have experienced a shortage of available labour since the reopening of the economy caused by the combined impact of Brexit and the pandemic on labour supply.
We seek to be an employer of choice and continually review pay and benefits structures to remain an attractive employer. The labour shortage and rises in the national living wages are leading our business and its competitors to drive innovation within the industry to increase labour productivity both in stores and in the supply chain.
We have been in discussions with our landlords following the pandemic to seek rent concessions on sites where trade has been impacted, and to restructure leases where property values have fallen. We successfully managed to negotiate rent concessions with many landlords in the year. Where leases are no longer competitive, we will use break clauses in lease agreements. We will continually reassess our store portfolio as footfall patterns evolve.
Despite the impact of COVID‑19, Starbucks opened 14 new company-operated stores during FY21, whilst 5 stores permanently closed. New store openings were targeted in key Drive Thru locations with high traffic counts. In total, Starbucks now has 242 Drive Thru stores at the end of FY21, 24 of which are directly-owned and 218 of which are licensed/franchised stores.
Growth in the company-operated estate will be targeted on key city and Drive Thru locations, with a focus on store format innovation and high traffic count locations.
Starbucks has increased the number of licensed stores and franchised stores by a net 18 and 38 respectively, representing a 30/70 ratio of company operated to licensed stores (31/69 ratio in 2020). We have been very encouraged by the performance of these stores and expect more to open in FY22 as part of its targeted strategy for growth.
During the pandemic, Starbucks UK Coffee received a £25m loan from its parent company Starbucks Corporation to help offset the impact of reduced trading. This loan was paid off during the course of the year and the company is now debt free.
UK Corporation Tax
The Company reported a UK corporation tax charge of £5.4m on its UK Coffee business (2020 credit: £4.4M). No corporation tax was paid in the previous financial year as the company reported a loss, primarily due to the impact of the COVID-19 pandemic.
At the year end, there were more than 3,900 Starbucks stores in 43 markets across Europe, the Middle East and Africa (EMEA). Starbucks EMEA Limited is the main reporting entity for all the company’s activities in EMEA – excluding the UK business, which is reported separately as outlined above.
Starbucks operates in EMEA mostly on a licensed and franchised business model, rather than through direct ownership of stores. In simple terms, therefore, most of company’s revenues come from royalty payments.
During the peak months of the pandemic, Starbucks offered relief on royalty payments for its license partners to help offset the impact of closures and trading restrictions. As economies re-opened, trading restrictions eased and a form of normality was restored, Starbucks worked with its partners to restore normal payment terms.
The reinstatement of royalty payments resulted in a sharp increase in revenue, year on year, to $237.4m for the period compared to $168m a year earlier – a 41% increase.
The improvement in revenues led to the business reporting an operating profit of $40.5m compared to a loss of $74m in the same period last year.
Starbucks EMEA Limited also offered financial support to various of its subsidiaries across the region during the pandemic. As the recovery has taken hold, this financial support has also reduced. This reduced expenditure has cut the cost of sales for the business to $71.3m (2020: $87.1m).
EMEA market trends
Across EMEA, we have seen considerable success with new store formats and new sales channels. By the end of the accounting period, approximately 23% of our stores in EMEA were equipped to handle mobile order and pay – up from 16% a year earlier. Similarly, around 870 of our stores in EMEA were handling deliveries – approximately 22% of the total, up from 7% a year earlier. Drive Thrus are our best performing store type in the region, which is symbolic of the formats where we see the fastest growth.
EMEA operational challenges
Our trading performance has been heavily-influenced by the status of lockdown measures in place in each geography at any given time. Many of our key markets have had to switch from operating on a “to-go” only basis, to then reintroducing limited seating as COVID restrictions have been relaxed and then a full reopening.
This has not been a linear progression in many of our key markets. In each of our markets, our teams have become agile at amending operations based on changing government guidelines and restrictions using our operational framework.
We have continued to reshape our business, in response to consumer trends that were already evident prior to the pandemic. A total of 97 stores were closed across EMEA during the period, 92 of which were traditional cafés. We are constantly reshaping our footprint to ensure that it matches with where people now spend their time.
EMEA corporation tax
Starbucks EMEA Limited reported a UK corporation tax charge of $13.2m for the year, compared to $3.1m for the same period last year. The payment increased owing to the improved trading performance of the business, which led to the business returning to profitability.
The headline profits of Starbucks EMEA Limited include dividend income of $150m (2020: $183.4M). This sum comprises income from other Starbucks group subsidiaries that passes through the company as part of the consolidation of the group accounts, in accordance with standard accounting practices. This dividend income has already been taxed in other jurisdictions before it is booked for accounting purposes as a profit in Starbucks EMEA Limited. As the income has been taxed already, it is exempt from further UK corporation tax charges.
The tax paid should be viewed in the context of the operating profit of $40.4m generated by Starbucks EMEA Limited, as opposed to the accounting profit of $190m – which includes dividend income that has already been taxed in the appropriate jurisdictions.
Post year-end and COVID-19 update
Whilst Starbucks has begun to regain the positive business momentum demonstrated prior to the pandemic, its operations in the UK and EMEA continue to be disrupted by COVID-19. In FY22, the Omicron variant resulted in UK government guidance to work from home where possible which had an adverse effect on footfall for stores in offices and city locations.
Health and safety remains a top priority for the business and the Company continues to assess and respond to government guidance. We have continued to invest in technology and establish partnerships with third parties to increase digital adoption. This flexible operating model will allow stores to continue to operate and mitigate the impact of further variants.
These developments also align closely with rapidly evolving customer preferences such as mobile ordering, contactless pick-up and Drive-Thrus, which naturally allow for greater physical distancing. We believe our continued investment in our store portfolio and technology will enhance the customer experience and position Starbucks for long term growth.
Latika Shah, [email protected], 07950 671948
John Kiely, [email protected], 07785 275665
About Starbucks® Coffee Company
Since 1971, Starbucks® Coffee Company has been committed to ethically sourcing and roasting high-quality arabica coffee. Today, with more than 33,000 stores around the globe, Starbucks® is the premier roaster and retailer of specialty coffee in the world. Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks® Experience to life for every customer through every cup.
Starbucks' EMEA headquarters has been in the UK since 2015, servicing the Europe, Middle East and Africa and driving Starbucks growth strategy in the region. Starbucks opened its first stores in Europe in 1998 and has since grown to 4112 stores across 43 markets, with the UK remaining as the largest market.